Efforts to liberalize world trade are increasingly focusing on strengthening the links between low-income countries' trade policies and their development strategies. However, although greater trade openness promises faster growth for poor countries, it also presents risks to those with small and undiversified economies. This pamphlet explores research by Fund staff into the nature and magnitude of these risks and proposes targeted policy solutions to ease adjustments and encourage developing countries to choose fuller participation in the world trading system.

Front Matter

The IMF launched the Economic Issues series in 1996 to make the IMF staff’s research findings accessible to the public. Economic Issues are short, nontechnical monographs on topical issues written for the nonspecialist reader. They are published in six languages—English, Arabic, Chinese, French, Russian, and Spanish. Economic Issues reflect the opinions of their authors, which are not necessarily those of the IMF’s Executive Board or management.

Preface

The expansion of trade has played a dynamic role in the growth of the global economy since World War II. But, until the Uruguay Round of trade negotiations began in 1986, multilateral trade deals tended to be limited to the industrial countries. While developing countries benefited significantly from the growth in global trade, they were rarely active participants in the bargaining process.

This had changed by 1994, when the Uruguay Round, the most comprehensive multilateral trade negotiation in history, was completed, and the new World Trade Organization (WTO) succeeded the General Agreement on Tariffs and Trade (GATT). The more advanced developing countries had accepted trade-opening obligations in exchange for fuller access to industrial country markets, while the poorer developing countries had agreed to adopt, over time, the same nondiscriminatory rules followed by the major trading nations. A number of important issues remained unresolved, however.

WTO trade negotiations to address the Uruguay Round’s unfinished business were launched in Qatar in 2001. The so-called Doha Round—also known as the Doha Development Agenda because of the high priority attached to developing country interests—encompasses manufacturing, agriculture, and services; calls for the tightening of trading rules and special provisions and assistance for developing countries; and addresses problems with the implementation of certain Uruguay Round commitments. But participants are having difficulty reaching agreements on key issues—particularly the dismantling of industrial country protection for agriculture. Agriculture has been so contentious that it has eclipsed trade in manufactures and services, two areas that are also important for many developing countries.

The scope for industrial countries to strike mutually beneficial bargains with each other is shrinking. Attention in the WTO is increasingly shifting toward trade between industrial and large developing countries, as the latter use their relatively closed markets for services, capital, and manufacturing as bargaining chips in negotiating for greater access to industrial markets for agriculture and labor-intensive manufactures and services.

The stakes are different for the smaller, less developed countries. Under preferential agreements, many now enjoy virtually unimpeded access to certain industrial country markets. They are leery of multilateral trade liberalization because of concerns about adjustment costs, food security, and the loss of export markets to more competitive countries. They also fear that increasingly complex trading rules might be expensive to implement and therefore hamper their ability to pursue development policies. However, there is large untapped potential in more open trade among developing countries. All countries would benefit from faster global growth as a result of continuing multilateral liberalization. Each country’s own trade reforms can boost development. And the opportunities that greater integration offers over the longer term far outweigh the short-term costs—which, in any case, must not be overestimated. With help from the international institutions and donor countries, implementation and adjustment problems should be manageable.

Recent research has devoted much attention to trade issues—in particular, the relationship between trade, economic growth, and poverty reduction, and the costs and benefits likely to accrue to low-income countries that liberalize their trade regimes. This Economic Issue summarizes IMF staff findings on these topics. The papers on which it is based are cited in the text and are available free of charge on the IMF’s website.

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